Private Equity and Venture Capital in Australia Private Equity and Venture Capital in Australia Your name: Course Number: course title Instructor: name here Date here 1 Private Equity and Venture Capital in Australia Table of Contents PRIVATE EQUITY AND VENTURE CAPITAL IN AUSTRALIA3 EXECUTIVE SUMMARY3 INTRODUCTION3 SIZE AND COMPOSITION OF THE MARKET AND EVALUATION5 MEDIA ETHICAL PERSPECTIVE OF THE INDUSTRY5 ETHICAL DISCUSSION6 CONTRIBUTION OF VENTURE CAPITAL AND PRIVATE EQUITY TO COMMON GOOD7 CONCLUSION7 REFERENCES9 2 Private Equity and Venture Capital in Australia 3 Private equity and Venture Capital in Australia Executive summary ‘Venture capital is an important contributor to many of the innovations that drive improvements in productivity and living standards people. Many of the most successful and innovative companies’ carrying out business in the global economy, including Google and Starbucks, were financed in their early stages by venture capital’ (Regan, DandTunny, G. (2008). Venture capitalists provide the finance, at least initially, so that the ideas of innovators and entrepreneurs can be developed and brought to market. In Australia, venture capital has helped create and grow many innovative firms, including ‘Austral (the world's leading manufacturer of fast ferries and passenger watercraft), Wizard Home Loans, and Seek (the internet job advertising service)’ (Regan, Dand Tunny, G. (2008). Venture capital is a subset of the private equity market. Private equity covers professionally managed pools of funds seeking investment in high-risk high-return opportunities in unlisted companies or situations. The paper shall explain the definitions of both venture capital and private equity, the size of the market these funds command and how they can be effectively evaluated. The paper presents an overview of the media perspective of the industry, in general, relative to the two forms of financing. To conclude, it shall dwell on the contribution of venture capital and equity financing on the economy in Australia. Introduction In finance, “private equity is a type of equity and one of the asset classes consisting of equitysecurities and debt in operating companies that are not publicly traded on a stock exchange.” Kaplan, S. N., & Schoar, A. (2005). A private equityinvestment will generally be made by a private equityfirm, a venture capital firm or an angel investor. Private Equity and Venture Capital in Australia 4 Venture capital covers seed, early stage and expansion stages of investment, usually initial public (IP) based, with prospects for rapid growth, and with a higher risk/higher return profile than later stage private equity investment.’ Private equity is not necessarily high risk since some are well established and are low risk. The focus of venture capitalists is typically in bringing a start-up firm to an initial public offering (IPO) or having it merged with or acquired by another firm, after around three to five years of close involvement. Australia has a good number of renowned venture capital firms that finance small and medium sized ventures across the industry. There are a lot of options for the firm to choose from ranging from seed level, large rounds investment funding and even series A level funding. The following are the most accomplished venture capital firms in Australia: -Arowana capital, Banksia capital, Brandon capital partners, Talu ventures, Equity partners and ANU connect ventures. All these firms are located in Australia and provide sufficient amount of funds to run businesses and improve the economy of the nations. On the other hand, private equity fund usually provides late stage capital to companies in order for the companies to achieve hyper-growth and which are seeking more funds to expand aggressively into the emerging markets. For the start up ecosystem, these firms play a major role thus considered a significant contributor to the economy especially at the later stages of small and medium sized companies. The following firms make up the major list of companies capable of providing private equity in Australia. The companies include-A creation Investment management, Advent private capital, Anchorage capital, Archer capital, Allegro funds, Champ private equity, catalyst investment, crescent capital partners and Direct capital. Private Equity and Venture Capital in Australia 5 Size and Composition of the Market and Evaluation The proof of the benefit of the PE model lies in the performance of the firms acquired and transformed by PE management. The Australian Bureau of Statistics (ABS) does not collect the data required to analyze the economic contribution of PE in Australia the size can only be speculated. The analysis in this report is based on survey data provided by members of The Australian Private Equity and Venture Capital Association Limited (AVCAL). The survey focuses on PE investee firms and the survey responses are representative of the population of PE investee firms. It is estimated that PE investee firms in Australia turn over an ‘estimated $63.5 billion per year, contributing around $58 billion in total value added and 512,000 full-time equivalent jobs to the economy’(Deloitte Access Economics (March 2013). If private equity investee firms were an industry in their own right, their revenue would exceed coal mining or the general insurance industry; and they would directly employ more people than the automotive industry or the banking industry. Around two-thirds of PE, investee firms could be classified as ‘medium-sized based on their annual revenue of $10 to $200 million. Of the remaining firms, the majority was large, with annual revenue exceeding $200 million’ (Deloitte Access Economics, 2013). This weighting differs from listed firms, where large firms are the majority, and the broader economy, where small firms dominate. Media Ethical Perspective of the Industry Venture Capital (VC) is often viewed by the mainstream media as an exciting and glamorous part of the entrepreneurial landscape. The popular image portrayed is that of “Dragon’s Den” where the hopeful would-be the entrepreneurs who pitch their ideas to a panel of wealthy Private Equity and Venture Capital in Australia 6 investors in a reality TV show. Within the university sector, the teaching of entrepreneurship is often focused on getting students to develop business plans and pitch them to prospective venture capitalists using the Dragon’s Den as a benchmark model. The study, prepared by one of the top global financial advisory firms, ‘Rothschild, in collaboration with AVCAL, has found that initial public offerings (IPOs) backed by private equity (PE) funds outperform comparable non-Private Equity-backed initial public offerings (IPOs) and not only in the short term but in the long term too’ (Gerald Ainomugisha, 2014). Venture capital has been observed over time to be the best alternative in filling the gaps that exist in Australia venture capital systems. This is evident in the sense that The VC funds will pick you up as soon as the angel investors have finished. Here angel funds are happy to give you the s the seed funds, but VC funds want to ensure that the average investor enjoys a revenue stream. Ethical discussion Although on the other hand, one of the most celebrated figures in the history of the computing industry, and a ‘founding father of the internet, has taken aim at Australia's attitude to venture capital, describing local investors as "greedy" and "nasty, accusing them of imposing excessive terms when backing domestic technology entrepreneurs’(McDuling, J ( 2015). Ethically speaking, the Australian venture capital has been given a bad reputation based on large venture capital firms taking advantage of small start up companies, especially in the IT industry. Gordon Bell statistics state that ‘venture and angel investors remain incredibly riskaverse. Worse, it is stunting the growth of local start-ups and forcing many offshore. Private Equity and Venture Capital in Australia 7 It's almost worse than getting money from a bank,’ (McDuling, J(2015). Bell tells AFR Weekend from his apartment on the edge of Sydney's CBD, where he spends four months each year. Although in the ‘big picture venture capital and private equity is beneficial for the economy as a whole there have been instances where venture capitalists have disturbed the growth of a startup company by getting too involved in the business operations. Start-ups think that there is not enough capital whereas VC funds think there are not enough feasible startups to utilize the available funds’.(McDuling, J(2015) Contribution of Venture Capital and Private Equity to Common Good Ethical Perspective The common good isthat which benefits the society as a whole, in contrast to the private good that only benefits individuals and certain sections of society. Dr. Woodthorpe hits on a series of trends, challenges and success stories impacting on Australia's venture capital sector. Successful Venture Capital investments have had immense follow-on effects over a long period of time. That is effects such as job creation, tax revenue, and the other broader economic effects. According to Woodthorpe, One of the greatest challenges facing the Australian Venture Capital sector is the shortage of capital. Over the past decade, Venture Capital funds have raised capital from superannuation funds, endowments, and the Government. Venture capital and private equity financing have a significant contribution to the Australia economy thus contributing to the common good of Australia. Conclusion Survey data collected from AVCAL members indicate that, based on the average invested firm, private equity makes a substantial contribution to the Australian economy. Private equity Private Equity and Venture Capital in Australia 8 investee firms tend to be clustered in specific industry sectors and are deemed to be of medium size. Under private equity management, the firms are transformed, experiencing increasing revenue and expanding their workforces. Entrepreneurs frustrated with risk-averse Australian venture capitalists are setting up their own funds, hoping to reduce reliance on offshore money and chance encounters. The private equity industry, for its part, legitimately blames conservative local fund managers more interested in investing in PE funds offshore, not to mention a global flight from a risk which is only just reversing. Private Equity and Venture Capital in Australia 9 References DeloitteAccessEconomics (2013).The Australian Private Equity and Venture Capital Association Limited.Avaliable at:file:///C:/Users/HP%20User/Downloads/Deloitte%20Access%20Economics%20full%20report %202013.pdf Dr. Katherine Woodthorpe (2011). , CEO of Australian Private Equity & Venture Capital. Available at: https://www.avcal.com.au/ Gerald Ainomugisha (2014) is private equity backing the key ingredient of a successful Australian IPO. Available at: http://anthillonline.com/is-private-equity-backing-the-keyingredient-of-a-successful-australian-ipo/ Kaplan, S. N., & Schoar, A. (2005). Private equity performance: Returns, persistence, and capital flows. The Journal of Finance, 60(4), 1791-1823. McDuling, J (Nov 21 2015). 'Greedy, nasty' venture capital sector stunting Australia's start-ups, says computing guru. . Available at: http://www.afr.com/technology/greedy-nastyventure-capital-sector-stunting-australiasstartups-says-computing-guru-20151119-gl38m1 Private Equity and Venture Capital in Australia 10 Regan, DandTunny,G.(2008).Venture capital in Australia .Available at: http://www.treasury.gov.au/
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